Fed's Emergency Rate Cut Fails to Calm Markets

March 04, 2020

For the eighth time in history, the Federal Reserve attempted to support equity markets with an emergency rate cut. The surprise cut was met with heavy selling pressure, as market participants "sold the news" after an initial pop in equity prices. Bond yields continued to descend as the 10-year Treasury fell intraday to an all-time low of .908%. 

Today the Federal Reserve took emergency actions to support financial markets. Here is a history of the eight instances when the Federal Reserve took emergency measures to cut interest rates:

  • October 15, 1998
    • -.50% cut - Long Term Capital Management Collapse  
  • January 3, 2001
    • -.50% cut - Effort To Avoid Recession Coming Out Of The Dot-Com Bubble  
  • April 18, 2001
    • -.50% cut - Second Effort To Avoid Recession Coming Out Of The Dot-Com Bubble
  • September 17, 2001
    • -.50% cut - 9/11 Attacks
  • August 17, 2007
    • -.50% cut - Sub-Prime Mortgage Collapse
  • January 22, 2008
    • -.75% cut - Credit Crisis  
  • October 8, 2008
    • -.50% cut - Lehman Brothers Collapse
  • March 3, 2020
    • -.50% cut - Coronavirus

There are three reasons why the market sold off today:

  1. The Fed's rate cut spooked market participants, as prior emergency Fed action has typically been associated with prolonged periods of adverse market conditions. With a narrative from public officials that the coronavirus is similar to the flu, it brought into question if the virus is worse than what the public is being told. While there is still no need to panic over the impacts to health over the coronavirus, the Fed's emergency measures do show that they believe the impact to economic activity from the virus has the potential to be severe in the short-term.                                                                                                                                                                                                                                        
  2. Cutting interest rates will have little effect on business and consumer activity that is poised to change if the virus spreads in the U.S. Lower interest rates will not make someone want to go to a packed stadium to see a game, travel on a cruise, eat at a restaurant, go to a movie theater, shop in a packed mall, or attend a business trip in an area where there is active outbreak of the virus.                                                                                                                                                                                                                               
  3. The virus is aggressively spreading outside of China (chart provided above). Now that the U.S. is days from being able to test for the coronavirus on a wider scale, we are almost certain to see an uptick in cases. This is not something to panic over, as it should be expected at this point.

This coming weekend we get the first real glance on the impact of the coronavirus to the Chinese economy. On March 7th, China is set to release January & February exports and imports year-over-year. Here are the previous readings and consensus expectations:

  • Exports YoY
    • Previous: +7.9%
    • Consensus: -4.8%
  • Imports YoY   
    • Previous: +16.5%
    • Consensus: -6.0%    

Hopefully, over the next couple of quarters, equity markets can find their footing. It will be interesting to see the Q1 earnings for U.S. companies which come out starting in April. This data should enable markets to more accurately price in the economic effects of the coronavirus to equity prices. In the meantime, expect volatility to remain at elevated levels as markets price equities based on assumptions.